Hikes and Highs

Hikes and Highs

The past three weeks brought a decisive, hawkish resolution to the policy drama that had built all summer, yet equities still powered to fresh record highs before stalling in the last 48 hours. Both the Fed and the ECB raised rates, bond yields climbed to levels not seen in over two decades, and an extraordinary wave of AI dealmaking drove the major indices to new peaks; until oil, yields and the first real flickers of AI caution took some of the shine off into this week.

On the central bank side, the long-anticipated moves landed. The Fed raised its target range by 25bps to 3.75-4.00% on 16 September in a unanimous vote, with Chair Warsh calling inflation “too high for too long” and the dot plot penciling in one more hike before year-end. The minutes, released on 7 October, reinforced that hawkish unity: all officials backed the September move and most saw a further increase as likely, which has left markets now essentially fully pricing a 25bps hike at the December meeting. The ECB had moved a week ahead of the Fed, lifting its deposit rate by 25bps to 2.50% on 10 September — its second hike of the cycle; warning the energy shock could keep inflation above target for an extended period. Its 29 October decision is live, with another move a realistic possibility.

The data backdrop supported the hawkishness, at least before it went dark. August CPI held at 3.4% year-on-year, but core ran hotter than expected and wholesale prices (PPI) came in at 5.4%, confirming sticky underlying pressure. The complication: a US government shutdown that began on 1 October has frozen official data, delaying the September jobs report and subsequent releases indefinitely. Investors have leaned on private gauges such as ADP, which point to a softening, “low-hire, low-fire” labor market, while the Fed is left setting policy with reduced visibility.

On the geopolitical front, the Iran situation re-escalated and kept a firm bid under energy. Oil surged this week; Brent pushing above $104 and WTI above $102 on reports challenging the assumption that President Trump would hold off on further escalation until after next month’s midterm elections. The renewed energy pressure is precisely the inflation the central banks are fighting. The Russia-Ukraine conflict remained a background factor which seems to be on a stalemate.

In terms of market moves, the standout was the relentless climb in long-term borrowing costs. The US 10-year Treasury yield reached around 5.35%, the highest level since 2002, and the 30-year neared 5.7% driven not only by sticky inflation but by mounting unease over the ballooning US fiscal deficit. The German 10-year Bund moved back above 3.5%, and European bank shares came under pressure this week. For most of the period equities shrugged all this off; the S&P 500 broke above 7,800 for the first time, logging its 28th record close of the year. The last two sessions were softer, however, with the Nasdaq 100 index falling by over 1% on 8 October as AI caution and the oil price surge, leaving the S&P around 7,766. Gold is keeping its support level intact around the $4150 level with EURUSD taking a leg lower to the 1.1175-1.1275 context.

On the corporate side, AI dealmaking reached fever pitch and became the market’s dominant engine. Nvidia unveiled plans to invest up to $100bn in OpenAI, while AMD struck a multi-year chip-supply deal with OpenAI that sent AMD up 25% in a single session and handed OpenAI options over up to 10% of AMD’s equity. The scale of these circular, interlocking commitments has powered the indices but sharpened the debate over whether valuations are echoing the dot-com era, a debate that finally showed up in price action this week. OpenAI and Anthropic remain the marquee names whose anticipated listings continue to draw intense interest.

Looking ahead…

The immediate focus is the duration of the shutdown, which will determine when official data and clarity for the Fed resumes. Both the Fed (28 October) and ECB (29 October) decisions loom at month-end, with further hikes in play, and Q3 earnings season begins in earnest with a high bar of roughly 25-30% expected S&P earnings growth. With equities at records, yields at multi-decade peaks, oil re-escalating and breadth still narrow, the tension between a resilient AI-led bull market and an ever more expensive cost of money has rarely been sharper. Have a good weekend.

Written by: Michael Konstantinou, Head of Portfolio Management